A certificate of deposit (CD) refers to a time (or term) deposit which, most often, cannot be withdrawn (without penalty) until the expiry of a designated period of time or ‘term.’CDs are offered to customers by financial institutions such as banks, credit unions, etc. During the term, the CD funds earn interest, usually a higher interest rate than that available via conventional savings accounts.
Similar to conventional savings accounts, CDs are insured by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration), therefore, they are virtually risk-free. The term of a CD can vary, for example, three months, six months, one year, two years, up to 5 years or greater. During the term, in exchange for agreeing to leave the money in the CD, the customer is usually offered a higher fixed interest rate than is available for monies available for withdrawal on-demand (e.g., savings accounts), although, adjustable rates are sometimes available as well.
Today, there are many financial options available to retirees as well as to those planning for retirement. While many individuals employ conventional mechanisms such as interest-bearing savings and mutual fund accounts, many have opted to use CDs to assist in funding their retirement. Most often, individuals rely upon the interest of CDs to fund their living expenses. In other words, once a CD matures, the principal is often rolled into another CD while the accrued interest becomes available living expenses. As can be imagined, this cycle can continue and enable a retiree to fund, or otherwise supplement, retirement expenses.
Unfortunately, this practice can be problematic for individuals who cannot generate enough income for their basic retirement living expenses or do not know how to manage their savings to last their lifetime. They end-up in an attempt to insure their own longevity by diligently shopping financial institutions for the highest interest rate possible in attempt to maximize income. This is also a problem for financial institutions. As will be understood, this rate is not always available at the same financial institution. Thus, money is often moved from bank to bank throughout the cycle thereby reducing the ‘stickiness’ (e.g., retention) of funds for the institution.